Managing cash flow is an issue for many small businesses. This is especially true for newer ones, as many startup ventures are undercapitalized and lack the resources to meet their ongoing needs. Established businesses, however, are not immune from cash flow problems.
Cash flow is the net of the inflows and outflows of business cash. It makes no difference if the business is a sole proprietorship or employs hundreds. Cash flows in from receivables or other payments into the business; cash flows out to pay salaries and rent, purchase materials or goods to be sold, and other expenses necessary to operate the business.
Cash flow is positive when incoming cash exceeds outgoing cash and negative when outgoing cash exceeds incoming cash.
Growth takes cash. Businesses need to spend money to generate revenue. The spending typically occurs before the revenue comes in; you need to have inventory or goods to sell, or the people or resources to perform the services, and these expenses come before the revenue is created.
Many businesses experience cash flow difficulties due to the time lag between when the funds are spent and when payments come in. Without a sufficient buffer to fund operating expenses, even a profitable business can have cash flow difficulties.
How best to deal with cash flow problems depends on how advanced the problem is. Cash flow, like many other problems, is best dealt with in advance.
Avoiding Management Difficulties
Cash flow problems can be managed proactively. It is a lot easier to raise capital when you don’t need capital. Banks are very willing to lend to businesses that don’t really need the money and very reluctant to lend to those in dire straits. The best time to raise capital or secure a business line of credit is before you need it.
Small business owners should project their future cash flows for at least the coming year. The level of detail needed depends on how tight cash is; the less cash available the closer it needs to be monitored.
A cash flow projection should consider all sources and uses of cash. This is different from an accounting statement of cash flows, which looks backward at cash use during the prior period.
To manage cash, we need to look forward.
If you are looking to grow your business, you may need to spend money before the new revenue comes in. Additionally, many businesses are seasonal and need to squirrel away cash for leaner months.
Business owners should consider the avenues available for raising capital before it is needed. This may be through bank or SBA loans, a line of credit, or in some cases tapping personal resources such as home equity or retirement accounts. Always be mindful of tax implications and risks when using personal or retirement assets to fund your business needs.
If you have taken the steps to build reserve capital, or access to that capital, you have made a major step in avoiding cash flow pitfalls.
Whether or not you have sufficient cash, your businesses can improve cash flow by managing specific aspects of inflows and outflows.
Managing Cash Inflows
Cash inflows are something we can influence, even if we can’t always control them directly. Customers can promise to pay and not keep that promise. Things don’t always work the way we plan. But we can improve our inflows in several ways.
If the business invoices customers, we should be sure the invoices go out immediately. There is no room for lag when cash is tight.
Consider offering a discount for cash payments up front, or discount terms for prompt payment. Many businesses offer favorable terms if an invoice is paid within 15 days, even if it isn’t due until 30 days after invoiced.
For example, seeing “2% 15, net 30” on an invoice indicates that a 2 percent discount is available if the invoice is paid within 15 days; otherwise the net amount is due within 30 days. Not every customer will take advantage of a discount, but it can improve cash flow due to those that do.
If the business usually takes checks for payment, consider adopting mobile payments.
Technology has made it easy to get money right away, and many customers find it easier to pay by card than by check. This is a great option for contractors and others who take checks as payment for services.
Requiring upfront payment, either in full or part, can improve cash flow immensely. This is most important for larger orders, and many customers won’t have a problem with at least a partial prepayment for a large job.
If you have inventory or assets that you do not need or use, consider selling them to raise capital. Many small businesses have equipment they could do without, and this could be turned into cash.
Managing Cash Outflows
Though we can influence inflows, we have greater control over outflows. Some expenses have no leeway; we should pay our employees promptly and make sure we are up to date with essentials. When we pay our bills has a large effect on cash flow.
We should be paying as late as we can without paying late. That’s the ideal. If we can pay electronically, we can pay on the last day. If we must mail a payment then we must allow for mail time as well. If we have suppliers who give us 30 days to pay our bills, we should take advantage of that and pay them on the 30th day.
You may be able to negotiate more favorable terms with some suppliers, especially if you have been doing business with them for a while.
Explain that you need to improve your cash position and see if they will extend your payment window out to 45 or 60 days.
Inventory is a cash drain for many businesses. If your business requires inventory, managing to keep that inventory to a minimum without disrupting sales can be a way to improve your cash situation. There may be excess inventory or obsolete inventory that could be sold to raise cash. Reducing the amount of inventory you carry, directly impacts your cash needs.
Managing Cash in a Crisis Situation
Sometimes little problems become big problems and then we have a real problem. When cash flow is a crisis, there are specific steps you should take, in addition to managing your inflows and outflows as described above. It is essential to map out your state of inflows and outflows so you can see exactly what needs to happen to solve the problem.
Communication is key. Suppliers will be more willing to work with you when they understand what is going on. If you aren’t paying your bills on time, they already know you are having difficulties.
Bringing them into the loop and letting them know you have a specific plan and time frame for rectifying the situation may be your best bet to get them to continue to work with you. They would rather see you through it than write off what you owe them. They can’t do that if they don’t know what’s going on.
Avoid the trap of paying as many little invoices as possible, trying to appease more vendors.
Slash unnecessary expenses. A crisis requires drastic action. Use your plan as an aid to see what will help bring you to positive cash flow the quickest at the least long-term cost. But you must get to positive. Negative cash flow is not indefinitely sustainable; it must be fixed.
The Bottom Line
Cash flow is the lifeblood of a small business. The best time to plan for cash needs is when things are going well — solve the problems before they happen. But the world provides us with situations we can’t or didn’t plan for. We also need to be able to look at where we are and take the specific steps necessary to get out of trouble.
Then we can take steps to make sure we don’t get back into trouble again. Cash flow is manageable, but you have to manage it.